3.1 Measuring
National Income
Circular Flow of Income
 National income
 Sum of all final goods and services
produced in an economy during a given time
period. (1yr)
 E=O=Y
Simple Two-Sector Model
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Leakages?
Injections?
What is missing?
Total injections= Total
Leakages
Transfer Payments
 How are welfare, education, social
programs accounted for?
 Rule: Only expenditure flows which have
a corresponding output are counted.
Methods of Measurement
 Factor Income: Total payments for FOP
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Employment
Rental Income
Profits
Interest
Subtract stock appreciation
=GDP at factor cost
 Expenditure Method: Total Expenditure
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Consumtion (C)
Investments (I)
Government Expend. (G)
Exports (X)
Subtract Imports (M)
Add subsidies
=GDP(same as factor cost)
 Output Method
 Value-added at each level of output (to avoid
double counting)
National and Domestic
Product
 GDP=output created using Domestic
FOP
 How do you deal with foreign owned
companies within economy?
 Domestic assets held abroad?
 GNP (Gross National Product)
= GDP+Net property income from abroad
 LDC= GDP>GNP Why?
 They have few companies abroad that are
repatriating income.
 MDC=GNP>GDP
 Many companies abroad
Gross and Net National
Product
 NNP= GNP-Depreciation
Nominal vs. Real
 Nominal= face value
 Real= adjusted for inflation
 GDPr= GDPnom/CPI X 100
Consumer Price Index
(CPI)
 Base Line= 100
 CPI of 106 = 6% increase in prices
GDP Deflator
 CPI: only consumer goods
 GDP Deflator: All goods in GDP
 GDPreal = GDP nom / Deflator X 100
Total and Per Capita
 Income per capita = GDP/population
 Real Income per capita: adjusted for
inflation
 Which countries do you think are in the
top ten by GDP per capita?
GDP by Country
USA 32.9% 4.65% Japan 13.4% 2.09% Germany 6.0% 1.36% Britain
4.6% 0.99% France 4.2% 0.97% China 3.7% 20.84% Italy 3.5% 0.95%
Canada 2.3% 0.51% Mexico 2.0% 1.62% Spain 1.9% 0.65%